Residential Mortgage Renegotiation during the Great Depression Andra C. Ghent Discussion by Kris Gerardi Federal Reserve Bank of Atlanta
2011 AREAUA Meetings
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
1 / 13
The “Old Days”
Perception that renegotiation between mortgagor and mortagee was prevalent in the pre-securitization era: In the old days, a mortgage loan involved only two parties, a borrower and a bank. If the borrower ran into difficulty, it was in the banks interest to ease the homeowners burden and adjust the terms of the loan. When housing prices fell drastically, bankers renegotiated, helping to stabilize the market. (Geanakoplos and Koniak, NYT, 2008)
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
2 / 13
The “Old Days”
Foreclosing is costly for both the borrower and the lender. The mortgage holder gains only half of what is lost by the homeowners, due to what we economists call underinvestment: the failure to maintain the house. In the old days, when the mortgage was granted by your local bank, there was a simple solution to this tremendous inefficiency. The bank forgave part of your mortgage; lets say 30%. This creates a small positive equity value – -an incentive — for you to stay. (Zingales, Economist’s Voice, 2008)
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
3 / 13
The “Old Days”
For decades, lenders in this circumstance could negotiate with can-pay borrowers to maximize the value of the loan for the lender (100 percent of the market value) and for the homeowner (a sustainable mortgage that lets the family stay in the home). Because the lender held the mortgage and bore all the loss if the family couldnt pay, it had every incentive to work something out if a repayment was possible. (Congressional Oversight Panel Report, 2009)
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
4 / 13
The Evidence
Is this perspective correct? Until now, the answer was ”We don’t know”. Ghent (2010) ⇒ Definitively NO!
Under very conservative assumptions, only 5% of loans from originated between 1920 and 1939 received concessionary modifications. 14% were terminated by a foreclosure or deed-in-lieu.
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
5 / 13
The Evidence
Is this perspective correct? Until now, the answer was ”We don’t know”. Ghent (2010) ⇒ Definitively NO!
Under very conservative assumptions, only 5% of loans from originated between 1920 and 1939 received concessionary modifications. 14% were terminated by a foreclosure or deed-in-lieu.
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
5 / 13
The Evidence
Is this perspective correct? Until now, the answer was ”We don’t know”. Ghent (2010) ⇒ Definitively NO!
Under very conservative assumptions, only 5% of loans from originated between 1920 and 1939 received concessionary modifications. 14% were terminated by a foreclosure or deed-in-lieu.
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
5 / 13
The Evidence
Is this perspective correct? Until now, the answer was ”We don’t know”. Ghent (2010) ⇒ Definitively NO!
Under very conservative assumptions, only 5% of loans from originated between 1920 and 1939 received concessionary modifications. 14% were terminated by a foreclosure or deed-in-lieu.
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
5 / 13
The Evidence
Is this perspective correct? Until now, the answer was ”We don’t know”. Ghent (2010) ⇒ Definitively NO!
Under very conservative assumptions, only 5% of loans from originated between 1920 and 1939 received concessionary modifications. 14% were terminated by a foreclosure or deed-in-lieu.
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
5 / 13
The Evidence
Is this perspective correct? Until now, the answer was ”We don’t know”. Ghent (2010) ⇒ Definitively NO!
Under very conservative assumptions, only 5% of loans from originated between 1920 and 1939 received concessionary modifications. 14% were terminated by a foreclosure or deed-in-lieu.
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
5 / 13
The Great Depression Era
1920s - 1940s is a nice period in which to test these assertions. Sky high unemployment rates. peaked at 25% in 1930. still above 15% by 1939.
Sharp decline in housing prices nationwide. Data is sparse, but Shiller estimates a 30% drop during the 1930s.
Resulted in a foreclosure crisis comparable to and likely worse than the current one:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
6 / 13
The Great Depression Era
1920s - 1940s is a nice period in which to test these assertions. Sky high unemployment rates. peaked at 25% in 1930. still above 15% by 1939.
Sharp decline in housing prices nationwide. Data is sparse, but Shiller estimates a 30% drop during the 1930s.
Resulted in a foreclosure crisis comparable to and likely worse than the current one:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
6 / 13
The Great Depression Era
1920s - 1940s is a nice period in which to test these assertions. Sky high unemployment rates. peaked at 25% in 1930. still above 15% by 1939.
Sharp decline in housing prices nationwide. Data is sparse, but Shiller estimates a 30% drop during the 1930s.
Resulted in a foreclosure crisis comparable to and likely worse than the current one:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
6 / 13
The Great Depression Era
1920s - 1940s is a nice period in which to test these assertions. Sky high unemployment rates. peaked at 25% in 1930. still above 15% by 1939.
Sharp decline in housing prices nationwide. Data is sparse, but Shiller estimates a 30% drop during the 1930s.
Resulted in a foreclosure crisis comparable to and likely worse than the current one:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
6 / 13
The Great Depression Era
1920s - 1940s is a nice period in which to test these assertions. Sky high unemployment rates. peaked at 25% in 1930. still above 15% by 1939.
Sharp decline in housing prices nationwide. Data is sparse, but Shiller estimates a 30% drop during the 1930s.
Resulted in a foreclosure crisis comparable to and likely worse than the current one:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
6 / 13
The Great Depression Era
30 Life Insurerց
Probability of default in %
25 20 15
ւS&Ls
10 5 Commercial Banksր 0 1920
1925
1930
1935
Source: Historical Statistics of the Unites States
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
7 / 13
Breakdown of Concessionary Modifications Zero instances of principal reduction. 2% of loans received rate reductions. Defined as reduction in rate of at least 25 basis points (relative to origination), and two standard deviations below rate on newly originated loans. Not shown, but standard deviation must be small, as average rate reduction only 78 basis points below rate on newly originated loans.
2% of loans received reductions in amortizing schedules. Less than 2% received balance increases that could indicate instances of forbearance. Defined as principal balance increases of less than 15%. Forbearance not considered example of concessionary modification by most market participants today. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
8 / 13
Breakdown of Concessionary Modifications Zero instances of principal reduction. 2% of loans received rate reductions. Defined as reduction in rate of at least 25 basis points (relative to origination), and two standard deviations below rate on newly originated loans. Not shown, but standard deviation must be small, as average rate reduction only 78 basis points below rate on newly originated loans.
2% of loans received reductions in amortizing schedules. Less than 2% received balance increases that could indicate instances of forbearance. Defined as principal balance increases of less than 15%. Forbearance not considered example of concessionary modification by most market participants today. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
8 / 13
Breakdown of Concessionary Modifications Zero instances of principal reduction. 2% of loans received rate reductions. Defined as reduction in rate of at least 25 basis points (relative to origination), and two standard deviations below rate on newly originated loans. Not shown, but standard deviation must be small, as average rate reduction only 78 basis points below rate on newly originated loans.
2% of loans received reductions in amortizing schedules. Less than 2% received balance increases that could indicate instances of forbearance. Defined as principal balance increases of less than 15%. Forbearance not considered example of concessionary modification by most market participants today. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
8 / 13
Breakdown of Concessionary Modifications Zero instances of principal reduction. 2% of loans received rate reductions. Defined as reduction in rate of at least 25 basis points (relative to origination), and two standard deviations below rate on newly originated loans. Not shown, but standard deviation must be small, as average rate reduction only 78 basis points below rate on newly originated loans.
2% of loans received reductions in amortizing schedules. Less than 2% received balance increases that could indicate instances of forbearance. Defined as principal balance increases of less than 15%. Forbearance not considered example of concessionary modification by most market participants today. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
8 / 13
Breakdown of Concessionary Modifications Zero instances of principal reduction. 2% of loans received rate reductions. Defined as reduction in rate of at least 25 basis points (relative to origination), and two standard deviations below rate on newly originated loans. Not shown, but standard deviation must be small, as average rate reduction only 78 basis points below rate on newly originated loans.
2% of loans received reductions in amortizing schedules. Less than 2% received balance increases that could indicate instances of forbearance. Defined as principal balance increases of less than 15%. Forbearance not considered example of concessionary modification by most market participants today. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
8 / 13
HOLC Implications Very convincing analysis, on important topic. But, I would stress the results on balloon mortgages and foreclosure more. Many commentators believe that a significant source of the high foreclosure rate during the 1930s was the unwillingness of lenders to refinance short-term balloon mortgages. Paper provides some strong evidence of this: Balloon mortgages that were set to expire were much more likely to enter foreclosure. BUT, this effect is only found during 1933-1935, the same period during which HOLC was operating!
Likely the case that HOLC was crowding out private refinances – see Table 4. Some evidence that HAMP is having similar effect with modifications today: Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
9 / 13
HOLC Implications Very convincing analysis, on important topic. But, I would stress the results on balloon mortgages and foreclosure more. Many commentators believe that a significant source of the high foreclosure rate during the 1930s was the unwillingness of lenders to refinance short-term balloon mortgages. Paper provides some strong evidence of this: Balloon mortgages that were set to expire were much more likely to enter foreclosure. BUT, this effect is only found during 1933-1935, the same period during which HOLC was operating!
Likely the case that HOLC was crowding out private refinances – see Table 4. Some evidence that HAMP is having similar effect with modifications today: Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
9 / 13
HOLC Implications Very convincing analysis, on important topic. But, I would stress the results on balloon mortgages and foreclosure more. Many commentators believe that a significant source of the high foreclosure rate during the 1930s was the unwillingness of lenders to refinance short-term balloon mortgages. Paper provides some strong evidence of this: Balloon mortgages that were set to expire were much more likely to enter foreclosure. BUT, this effect is only found during 1933-1935, the same period during which HOLC was operating!
Likely the case that HOLC was crowding out private refinances – see Table 4. Some evidence that HAMP is having similar effect with modifications today: Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
9 / 13
HOLC Implications Very convincing analysis, on important topic. But, I would stress the results on balloon mortgages and foreclosure more. Many commentators believe that a significant source of the high foreclosure rate during the 1930s was the unwillingness of lenders to refinance short-term balloon mortgages. Paper provides some strong evidence of this: Balloon mortgages that were set to expire were much more likely to enter foreclosure. BUT, this effect is only found during 1933-1935, the same period during which HOLC was operating!
Likely the case that HOLC was crowding out private refinances – see Table 4. Some evidence that HAMP is having similar effect with modifications today: Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
9 / 13
HOLC Implications Very convincing analysis, on important topic. But, I would stress the results on balloon mortgages and foreclosure more. Many commentators believe that a significant source of the high foreclosure rate during the 1930s was the unwillingness of lenders to refinance short-term balloon mortgages. Paper provides some strong evidence of this: Balloon mortgages that were set to expire were much more likely to enter foreclosure. BUT, this effect is only found during 1933-1935, the same period during which HOLC was operating!
Likely the case that HOLC was crowding out private refinances – see Table 4. Some evidence that HAMP is having similar effect with modifications today: Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
9 / 13
HOLC Implications Very convincing analysis, on important topic. But, I would stress the results on balloon mortgages and foreclosure more. Many commentators believe that a significant source of the high foreclosure rate during the 1930s was the unwillingness of lenders to refinance short-term balloon mortgages. Paper provides some strong evidence of this: Balloon mortgages that were set to expire were much more likely to enter foreclosure. BUT, this effect is only found during 1933-1935, the same period during which HOLC was operating!
Likely the case that HOLC was crowding out private refinances – see Table 4. Some evidence that HAMP is having similar effect with modifications today: Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
9 / 13
HOLC Implications Very convincing analysis, on important topic. But, I would stress the results on balloon mortgages and foreclosure more. Many commentators believe that a significant source of the high foreclosure rate during the 1930s was the unwillingness of lenders to refinance short-term balloon mortgages. Paper provides some strong evidence of this: Balloon mortgages that were set to expire were much more likely to enter foreclosure. BUT, this effect is only found during 1933-1935, the same period during which HOLC was operating!
Likely the case that HOLC was crowding out private refinances – see Table 4. Some evidence that HAMP is having similar effect with modifications today: Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
9 / 13
HAMP Mod rates were low, but there were actually some going on before HAMP started. Incremental effect from HAMP appears to be negative. Securitized Subprime Loans:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
10 / 13
HAMP Mod rates were low, but there were actually some going on before HAMP started. Incremental effect from HAMP appears to be negative. Securitized Subprime Loans:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
10 / 13
HAMP Mod rates were low, but there were actually some going on before HAMP started. Incremental effect from HAMP appears to be negative. Securitized Subprime Loans:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
10 / 13
HAMP Mod rates were low, but there were actually some going on before HAMP started. Incremental effect from HAMP appears to be negative. Securitized Subprime Loans:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
10 / 13
HAMP Mod rates were low, but there were actually some going on before HAMP started. Incremental effect from HAMP appears to be negative. Securitized Subprime Loans: Chart 25: Modifications (% 60+DQ Balance) 70
4.5
60
4.0 3.0
40
2.5
30
2.0 1.5
20
Monthly (%)
Cumulative (%)
3.5 50
1.0 10
0.5
0
0.0
Jan-08
Jul-08
Jan-09
Cumulativ e Gerardi (Atlanta Fed)
Jul-09
Jan-10
Monthly
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
10 / 13
Interpretation
Securitization not responsible for low concessionary modification rates. Very little securitization activity during Great Depression period. Potentially informative to the current debate over the effect of securitization on renegotiation activity...
Suggestive of asymmetric information issues:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
11 / 13
Interpretation
Securitization not responsible for low concessionary modification rates. Very little securitization activity during Great Depression period. Potentially informative to the current debate over the effect of securitization on renegotiation activity...
Suggestive of asymmetric information issues:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
11 / 13
Interpretation
Securitization not responsible for low concessionary modification rates. Very little securitization activity during Great Depression period. Potentially informative to the current debate over the effect of securitization on renegotiation activity...
Suggestive of asymmetric information issues:
Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
11 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation: Simple Example Suppose we have two borrowers: Ed and Eric Ed and Eric both need payment reduction Both WILL DEFAULT without assistance Eric needs a 10% reduction. Ed needs a 50% reduction Foreclosure costs 60%.
Problem: I can’t tell Ed and Eric apart. Policy Do Nothing Cut 10% Cut 50%
Loss Eric 60% 10% 50%
on Ed 60% 60% 50%
Mean Loss 60% 35% 50%
# of Foreclosures 2 1 0
Both borrowers will default if you do nothing – no strategic default. Yet it is still profitable to foreclose. Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
12 / 13
Interpretation Information problems likely even worse than example: Re-default risk – estimates between 30% and 60% for current period. Self-cure risk – in example both borrowers will definitely default if no concessions are made, but in reality some borrowers will likely cure by themselves without assistance.
Author suggests that information issues may not be as bad in current environment compared to Great Depression period. Better data and technology.
I’m not so sure. Mortgage menu much larger today – Lots of low-doc or no-doc mortgages. “Small-town” banks supposedly knew more soft information about borrowers... Worse economic environment in Great Depression period, so strategic behavior maybe not as big of a deal (i.e. very low self-cure rates) Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
13 / 13
Interpretation Information problems likely even worse than example: Re-default risk – estimates between 30% and 60% for current period. Self-cure risk – in example both borrowers will definitely default if no concessions are made, but in reality some borrowers will likely cure by themselves without assistance.
Author suggests that information issues may not be as bad in current environment compared to Great Depression period. Better data and technology.
I’m not so sure. Mortgage menu much larger today – Lots of low-doc or no-doc mortgages. “Small-town” banks supposedly knew more soft information about borrowers... Worse economic environment in Great Depression period, so strategic behavior maybe not as big of a deal (i.e. very low self-cure rates) Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
13 / 13
Interpretation Information problems likely even worse than example: Re-default risk – estimates between 30% and 60% for current period. Self-cure risk – in example both borrowers will definitely default if no concessions are made, but in reality some borrowers will likely cure by themselves without assistance.
Author suggests that information issues may not be as bad in current environment compared to Great Depression period. Better data and technology.
I’m not so sure. Mortgage menu much larger today – Lots of low-doc or no-doc mortgages. “Small-town” banks supposedly knew more soft information about borrowers... Worse economic environment in Great Depression period, so strategic behavior maybe not as big of a deal (i.e. very low self-cure rates) Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
13 / 13
Interpretation Information problems likely even worse than example: Re-default risk – estimates between 30% and 60% for current period. Self-cure risk – in example both borrowers will definitely default if no concessions are made, but in reality some borrowers will likely cure by themselves without assistance.
Author suggests that information issues may not be as bad in current environment compared to Great Depression period. Better data and technology.
I’m not so sure. Mortgage menu much larger today – Lots of low-doc or no-doc mortgages. “Small-town” banks supposedly knew more soft information about borrowers... Worse economic environment in Great Depression period, so strategic behavior maybe not as big of a deal (i.e. very low self-cure rates) Gerardi (Atlanta Fed)
Residential Mortgage Renegotiation during the Great Depression January, 6 2011
13 / 13